Venture Capital 2024

Global Overview 2024

Both the global venture capital industry and the ecosystem encompassing growth companies have recently been subjected to profound transformations marked by shifts in key metrics such as elevated discount rates impacting company valuations, a decline in successful exits, and an uptick in investor-friendly deal terms coupled with a surge in bridge financing arrangements. In terms of the business models pursued, venture capital-backed start-ups globally have shifted the focus away from the B2C-centered, e-commerce-heavy wave of the 2000s in the USA and the 2010s in Europe. Today, they seem to disrupt and innovate in virtually every industry, including the most capital-intensive ones.

The venture capital industry and its portfolio companies have evolved to become a shaping force in and for the global economy. Total venture capital investment volume in 2023 amounted to USD345.7 billion on a worldwide basis, marking a significant decrease from previous figures of USD531.4 billion (in 2022) and USD744.8 billion (in 2021) and lingering at a five-year low. A total of 37,809 venture capital-related transactions affecting growth companies globally ‒ including financing rounds, M&A deals, and IPOs ‒ amounted to a further 28% deceleration from the 51,894 transactions recorded in 2022.

Early-stage financings dominated, accounting for 70% of all deals. On the other end of the life cycle, total exit value dropped to USD224.7 billion – amounting to no more than the combined value of Uber’s, Facebook’s, and Coinbase’s public offerings and the lowest annual total since 2017.

Median deal sizes across Series B, C, and D+ rounds declined in every region compared to 2022, with D+ financings most exposed and down from USD106.8 million to USD60 million in the Americas, from USD130 million to USD59.4 million in Europe, and from USD48.6 million to USD29.9 million in the Asia‒Pacific region. Unicorn venture capital deal flow likewise saw a significant decline to USD84.5 billion in 2023, down from USD139.8 billion in 2022 ‒ with a total of 1,354 active start-up companies now valued at more than USD1 billion globally.

Notably, artificial intelligence (AI) emerged as a prominent vertical. AI start-ups raised USD42.5 billion across 2,500 equity rounds, resulting in the creation of 22 new unicorns. Microsoft’s investment in OpenAI was widely reported to top USD10 billion.

In terms of geographical distribution, the USD179.1 billion deployed in North America led the way, followed by Asia (USD91.1 billion) and Europe (USD61.9 billion). Further underlying the significance of geographic disparities, Europe’s total number of unicorns has grown by an average rate of 88% since 2014 ‒ outpacing the USA’s rate of growth (56%). With 514 companies valued at USD1 billion or more across 65 cities in 25 countries, Europe is home to the highest density of “tech unicorn cities”. Overall, venture capital funding has become more diverse in geographic terms. While start-ups in the Asia‒Pacific region have become venture capital darlings, thanks to their rapid growth and massive markets, Europe’s share of global venture capital funding has quadrupled in the last 20 years ‒ the continent now takes in more than a third of global investments at early-stage.

At the same time, North America remains the centre of gravity. In terms of micro-geographies, the California Bay Area takes the USA’s lead, with USD41.4 billion invested in venture capital-backed companies in 2023. In addition to OpenAI and Stripe, Anthropic raised a total of nearly USD7 billion in funding in 2023 alongside Inflection AI and Juul, who each raised USD 1.3 billion. In Europe, out of the continent’s total of USD48.4 billion invested, the UK (USD20.3 billion), France (USD9.3 billion) and Germany (USD8.2 billion) took the top spots. The most sizeable European transactions were Swedish clean energy tech start-up H2Green Steel (EUR1.5 billion) and French low-carbon battery-maker Verkor (EUR1.4 billion).

The most substantial funding round in Asia was secured by Singaporean fashion retailer Shein in May 2023, raising USD2 billion ‒ albeit cutting its valuation by a third. Conversely, Chinese companies dominated four out of the five largest funding rounds, with chipmaker GTA Semiconductor at the forefront, securing USD 1.9 billion.

Key Trends

Interest rate-adjusted valuation levels

Amid challenging geopolitics, macroeconomic uncertainties, and idiosyncratic regional headwinds, the valuations of growth companies have declined since 2021. This trend is reflected both in financing round valuations and the exit value for liquidity events. To illustrate the point, the number of valuation step-ups (increase in a company’s pre-money valuation between two consecutive financing rounds) fell to a ten-year low globally in 2023. That said, in the current cycle of the industry downturn, many assess that valuations have bottomed out.

The global exit value for liquidity events of growth companies (such as M&A trade sales or IPOs) amounted to USD224.7 billion in 2023, marking a decline from USD320.6 billion in 2022 and far away from the USD1.5 trillion deployed in 2021. Depressed valuations can be observed across geographies and affect North America (USD66.6 billion in 2023 vs 82.3 billion in 2022), Asia (USD143.4 billion in 2023 vs USD185.9 billion in 2022) and, most notably, Europe (USD12.6 billion in 2023 vs USD43.7 billion in 2022).

During the first three quarters of 2023, 26.4% of all financing rounds in the US market saw a flat or reduced pre-money valuation relative to the start-up’s last round. During this time, the estimated percentage of “down rounds” in Q3 2023 climbed to a ten-year high. Emblematic of the trend in terms of exit events, Instacart’s IPO valuation (opening price) amounted to approximately a quarter of the USD39 billion price-tag investors had put on its last private financing round. Other candidates such as marketing automation platform Klaviyo faced similar challenges.

Fundraising headwinds

In 2023, fundraising challenges were evident across the global marketplace. The total amount raised across 474 funds in the US market amounted to USD66.9 billion, less than 40% of the USD172.8 billion deployed in the preceding year. Besides the reduction in distributions from vintage funds, the decrease can be attributed to several other factors, including limited partner (LP) withdrawals prompted by rising interest/discount rates, a reallocation of assets to less volatile classes, a slowdown in start-up exits, and a general hesitation among venture capitalists to inject additional capital into companies facing declining valuation levels.

Fundraising opportunities were primarily concentrated among sizeable funds with prominent reputations and typically exceeding USD1 billion in targeted fund size, underscoring pre-existing market inclinations towards a concentration of capital allocation. Similarly, on the investment side, 2023 saw venture capitalists in the USA deploy funds at less than half of 2021 levels – a mere USD171 billion.

Against the backdrop of market fundraising highs in 2021 and 2022, however, total available “dry powder” in the venture capital industry reached global record levels of USD302.8 billion in 2023, with the majority (57.5%) concentrated in funds with commitments of at least USD500 million.

Shifting the focus towards the Asia–Pacific region, China finds itself navigating through macroeconomic headwinds against a backdrop of economic challenges. Notably, venture capital transactions involving Chinese start-ups and US investors witnessed a striking 88% decline between 2021 and 2023, plummeting from USD47 billion to USD5.6 billion. Sequoia Capital, which has invested in China since 2005, initiated the separation of its Chinese operation in 2023.

Amid China’s economic downturn, international investors seeking opportunities in Asia have directed their attention to Japan. However, investor activity remains subdued, with foreign investments accounting for only 10% of total investments in the first half of 2023 – down from 20% in 2022 and 25% in 2021. This tepid response can be ascribed to several factors, including the modest scale of Japanese venture capital deals, the cautious approach of the Tokyo Stock Exchange to listing new companies, and cultural barriers encountered by foreign investors.

Paradigm shift: growth vs profitability

The sustainability of a start-up’s business model, its margins, cash flow conversion, adaptable and recurring revenues as well as a clear-cut pathway to profitability have become a (re-)discovered focus area for venture capitalists and the broader community. The intensified pressure manifested itself in cost-cutting measures, a significant wave of tech lay-offs and declarations that the “war for talent” is over. At the same time, premiums on growth (as opposed to efficiency) continue to be particularly pronounced in sectors such as next generation software, biotech and AI – indicating a bifurcated market when it comes to terms growth companies can demand from investors.

Fewer exits, lacklustre distributions

Growth companies faced significant challenges with their exit strategies, placing substantial strain on sales processes for businesses. Globally, 2023 saw a total of 8,351 M&A exits (compared to 10,234 in 2022) and 424 IPOs (compared to 736 in 2022). The European market suffered most harshly, with 3,378 M&A exits in 2023 (down from 4,037 in 2022) and 43 IPOs (down from 86 in 2022), while the USA likewise felt the impact with 3,109 in 2023 vs 4,016 in 2022 and 61 IPOs (down from 77 in 2022). Few smaller ventures were presented with early sales opportunities and even late-stage growth companies backed by tier 1 venture capitalists were not immune to the dynamic.

Against the backdrop of a quadrupling of active venture/growth investors during the past decade, the near absence of liquidity events for growth companies in many markets has led to a decline in venture capital distributions in 2023 not seen since the global financial crisis. The 14-year low cuts off the industry’s circulation of lifeblood and poses question marks over LPs’ budgeting needs and the next generation of venture funds to be raised.

Alternative financing structures

Overall, declining valuations and rocky exit pathways have prompted demand for alternative transaction structures and financing solutions, which have provided a counterpoint to turbulent markets. At the same time, venture debt correlates with overall funding conditions, as equity funding tends to constitute a growth company’s primary repayment source.

Non-dilutive measures

With venture capital backing becoming both scarcer and more costly, start-ups are eyeing non-dilutive financing options as a viable alternative. In 2023, non-dilutive funding for European start-ups increased by 50% compared with the previous year. Unlike venture debt, which may include equity warrants, non-dilutive financing options include revenue-based financing and term loans. While most growth companies continue to prefer external equity financing in order to drive rapid growth, current market conditions have spurred a search for tailored alternative structures.

Bridge rounds

Similarly, venture capitalists have increasingly turned to bridge rounds (typically led by, or confined to, existing investors) in order to support their portfolio companies rather than following through with new investment rounds at terms deemed insufficiently attractive. The tendency was particularly discernible among late-stage start-ups, where valuation levels had decreased most significantly. The surge in bridge rounds among early-stage start-ups follows an initial period of more favourable capital raising conditions compared to late-stage companies.

Collapse of SVB

SVB, renowned for its role as a lender and banking ally to growth companies, carved out a niche in early-stage investments that other banks often shied away from owing to the inherent risks involved. Despite the moral effects of its demise reverberating through the ecosystem, garnering significant publicity among market-leading venture capitalists in its run-up and leading to other debt providers pulling back, it is noteworthy that SVB’s lending book value vis-à-vis venture capital-backed clients accounted for a mere 20%.

The aftermath of SVB’s collapse has ushered in significant shifts in the venture debt landscape, with lenders adopting more stringent standards, making it challenging for start-ups with uncertain financial prospects to secure costly loans amid rising interest rates. First Citizens, who acquired SVB in March 2023, now assumes a role closest to providing a similar brand of venture debt. SVB often granted loans in exchange for equity, aligning its approach closely with the venture economy, unlike other banks.

However, SVB currently operates at a fraction of its pre-crisis size, with deposits plummeting from a peak of approximately USD189 billion to USD38.5 billion, and has only made USD1.8 billion of venture debt commitments (compared to USD 4.3 billion at the end of 2023).

In the aftermath of SVB’s collapse, venture debt is expected to undergo far-reaching market changes once the dust settles. Notably, there has been a shift towards young companies diversifying their banking relationships, with many now maintaining accounts at two or three banks – a departure from the past, when SVB’s lending terms necessitated start-ups to house all their cash within its confines. Moreover, anecdotally, many lenders stopped lending to start-ups with fewer than 12 months of runway in the wake of recent turmoils. In response, non-bank lenders (including debt funds) have experienced a surge in demand for their services as a direct consequence of SVB’s collapse.

Ramification of Trends on Deal Terms

Deal terms reflect a shifting market

With numerous growth companies running low on cash, a need to raise in a compressed timeframe contributed to existing market pressures. Shifting dynamics have led to an altered transactional practice not seen in nearly a decade: venture firms’ enhanced negotiation leverage has permitted more investor-friendly terms, including more sizeable equity stakes and increased or cumulative dividend rights (guaranteed returns owed to shareholders, irrespective of the company’s financial performance). Cumulative dividends were present in 4.7% of all US venture capital deals in Q4 2021 and, notably, surged to 23.1% by Q3 2023.

In the realm of anti-dilution provisions, there has been a modest uptick in the utilisation of full anti-dilution ratchets to enhance investor protection during down rounds. However, weighted average ratchets remain predominant and were used in approximately 60% of all transactions in 2023.

In purchase or subscription agreements, a tangible tendency for founders to stand behind representations and warranties was discernible. This signals a shift by investors towards risk mitigation and a focus on documented due diligence, reflecting an overall more prudent investment approach.

Moreover, the allocation of board observer seats to investors’ representatives has increased. This trend mirrors investors’ aspirations for increased appetite for engagement in their portfolio companies governance and business aspects.

Investors were granted consent rights more frequently. As an example, in 42% of European convertible financings in 2023, investors were granted consent rights to certain investor protection matters – a departure from the traditional practice whereby convertible investors did not have such rights on account of their non-equity shareholder status at the time of investment. Additionally, there was an uptick in the proportion of convertible financings providing investors with information rights, which reached 23% in 2023.

Liquidation preferences have long been nearly ubiquitous in many jurisdictions, especially in early-stage financings. Participating liquidation preferences grant investors the right to receive their originally invested amount in the event of a sale or liquidation and, on top of that, share into any remaining proceeds with holders of common stock on a pro rata basis (“double dip”). A non-participating 1x liquidation preference with a conversion right for the investor typically constitutes the default. Despite shifting economics, there has not been widespread adoption of increasing preference multiples to more than 1x while regional practices seem to vary slightly. Any such increases, if agreed upon, are typically tailored to the specific circumstances of the situation. By contrast, investors have more frequently been able to negotiate participating liquidation preferences across all stages of a company’s development cycle than they have in recent years.

Continued trend towards standardised documentation

Documentation for equity-based financing tends to move towards standardisation across geographies, with key model documents originating from the National Venture Capital Association (NVCA), the British Private Equity and Venture Capital Association (BVCA), the German Startups Association (Bundesverband Deutscher Startups e.V.) and the Simple Agreement for Future Equity (SAFE) (as described in more detail later). Similar initiatives can be observed in many jurisdictions, including:

• Canada (Canadian Venture Capital and Private Equity Association, or CVCA);
• Singapore (Singapore Venture and Private Capital Association, or SVCA);
• Switzerland (Swiss Private Equity and Corporate Finance Association, or SECA); and
• China (China Venture Capital and Private Equity Association, or CVCA).

NVCA

The NVCA is a trade association that represents the venture capital industry in the USA. It has been publishing model documents for venture capital financing rounds since 2003, which have become the industry standard for practitioners and are frequently used even in bespoke and sizeable transactions. The set of documentation is regularly updated once a year to reflect evolving market norms. Today, NVCA documents affect key deal terms and market practice well beyond the shores of the jurisdiction they have been designed for.

BVCA

Similarly, the BVCA provides model documents for early-stage investments They illustrate the value standardised documentation for venture capital transactions holds across jurisdictions. The BVCA documents are utilised for post-seed early-stage investments in the UK, particularly in Series A funding rounds ‒ with the aim of facilitating the adoption of an industry-standard legal framework for such investments.

German Startups Association

The German Standard Setting Institute (GESSI) is a joint project by Business Angels Deutschland e.V. and the German Startups Association, which equips (registered) start-ups, business angels and investors with expertly crafted templates for their essential legal documentation, including convertible loans, term sheets and financing round agreements.

SAFE

Similarly widespread in adoption ‒ among early-stage companies, in particular ‒ is the so-called model SAFE agreement. SAFE governs a financial instrument in the early-stage financing context and was originally established in 2013 by renowned incubation hub Y Combinator. The template contemplates equity-like financing in exchange for yet-to-be issued shares, providing founders with flexibility and control with reduced paperwork. Prior to conversion, the investor’s claim is limited to prospectively issuable preference shares ‒ the rights to which are defined in the subsequent financing round. Funds carry no coupon or Paid In Kind (PIK) interest in the absence of a predefined maturity.

Key features in SAFE agreements include a valuation cap, which refers to a predetermined maximum for equity upon conversion and discounts investors receive off the price per share paid by new investors in a subsequently priced equity round (with around 20% being the norm). It became the go-to option for US early-stage start-ups, owing to its simplicity and focus on future growth potential, and is gradually replacing traditional convertible loan structures as the preferred financing option.

Drawbacks that come with the use of the SAFE structure include an absence of protection or control rights on the part of investors and, as regards the founding team, a potential underestimation of their collective dilutive effect if used vis-à-vis multiple investors.

Increasingly exacting foreign direct investment standards

Foreign direct investment regulation has become increasingly relevant in the context of cross-border financing rounds in growth companies, holding the potential to delay closing for non-domestic investors. This trend is evident not only in the USA but also in EU countries such as Germany.

CFIUS

The scope of the Committee on Foreign Investment in the United States (CFIUS)’ jurisdiction expanded significantly with the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) in August 2018. On 11 May 2023, CFIUS released new frequently asked questions (FAQs) on its website, offering additional guidance on timing for mandatory filings. Notably for growth companies, one FAQ clarifies that transaction parties are required to submit a mandatory CFIUS filing at least 30 days prior to closing, irrespective of deliberate transaction structuring to grant foreign investors solely passive economic and no other governance or contractual rights. This signifies a re-definition of the “completion date” of a transaction as the date on which any equity transfers to a foreign investor. Most mandatory CFIUS filings relate to US companies involved in “critical technology”.

According to the prior understanding of “completion date”, which was tied to the transfer of key rights, deferring those rights until after CFIUS clearance had been a common method to swiftly secure capital for US start-ups while adhering to mandatory filing timing rules. The mandatory CFIUS filing could occur post-capital injection, with investor rights deferred for the duration of the CFIUS process (often many months). However, this is now no longer an option. In 2022, CFIUS required mitigation in 52 (out of a total of 440) cases, representing 18% of total CFIUS notices – the highest percentage in its history.

After FIRRMA was passed, the NVCA updated its model VC Term Sheet to include several provisions regarding CFIUS review. Although rare as a “deal breaker” item in most cross-border financing contexts, efforts to compel TikTok’s divestment from its Chinese parent company, ByteDance, have been illustrative of potential concerns in the space since at least 2019.

Foreign Trade and Payments Ordinance

The past few years have also seen ever-increasing impediments and more exacting standards of review for non-EU investors. At the EU level, the regulatory framework for foreign direct investment (FDI) control is governed by Regulation (EU) 2019/452. However, a significant variance exists among national screening mechanisms, impacting the effectiveness and efficiency of the system in addressing security and public order concerns. Notably, in Germany, there is a 10% threshold in certain cases of critical infrastructure that may include less sizeable companies. If a non-EU/non-European Free Trade Association foreigner seeks to acquire at least 20% of the voting rights in a German company in one of 16 security-relevant areas of high and future technology, a reporting obligation is triggered.

Between 2020 and 2022, six EU member states collectively accounted for 92% of all cases submitted, underscoring a concentration of screening activities. Given that nearly 60% of FDIs within the EU were concentrated in three key sectors ‒ namely, Information and Communications Technology (ICT), retail, and manufacturing ‒ the control of FDI assumed heightened significance in regulating these sectors.

Outlook for 2024

Distressed venture capital and a narrow pathway to exit opportunities

Venture capitalists can be expected to seek and take advantage of strained conditions, including by increasing capital deployment in 2024 and beyond ‒ driven by projections of a higher number of underfunded and (highly) levered growth companies, as well as distressed debt. While the venture capital context may not be a primary driver therefor, the looming “maturity wall” ‒ particularly in the USA, where approximately USD351 billion of high-yield bonds and leveraged loans are set to mature in 2025 (compared with USD35 billion in 2023) ‒ signals the onset of a new investment cycle, which is likely to entail significant challenges for capital-intensive industries.

Broadly, venture capitalists continue to be downbeat about the immediate future of portfolio companies during 2024. Although a widespread rebound in IPOs is unlikely for 2024, mid-market or distressed buyouts may be a more realistic exit option for venture capital-backed start-ups. As many venture capital-backed companies find growth to constitute a currency in depreciation and start-ups are grappling with a path to profitability, bespoke deal terms and features borrowed from private equity (such as contingent consideration components or purchase price withholding mechanics) may be the sole viable option for many exits to occur. Outside pockets such as crypto, deep tech or AI, features of legal documentation may make a significant difference as to whether or not deals will be happening in the near term.

As a fading bull-market exit option which is unlikely to be available to growth companies in the near term, Special Purpose Acquisition Companies (SPACs) are facing challenges such as disappointing performances, structural issues, and dwindling investor confidence. A substantial portion of the 600-plus SPACs that went public in 2021 are approaching or have already passed their business combination expiration dates, resulting in liquidation without completing a de-SPAC transaction. Since the beginning of 2021, only 467 de-SPAC transactions have been completed.

Surge in evergreen funds

With the obvious challenges created by a lagging market for liquidity events, distributions to LPs and corresponding reinvestments, some have suggested that the at least 200 evergreen funds operating with an indefinite investment horizon in the venture capital space globally may be part of the industry’s response to a shifting investment landscape.

The evergreen fund space is widely expected to grow as the industry tries to mitigate the cyclicality of private markets ‒ albeit subject to regional divergences. The increased flexibility on the part of investment managers does, however, come at the price of significant opportunity costs as treasury yields remain elevated and assets locked in. The extent to which open-ended investment funds will contribute to addressing temporary market perturbances will therefore be contingent upon the evolution of LPs’ investment preferences, risk appetite, and patience.

Increased relevance of secondary trading platforms

Private secondary transactions have emerged as a crucial component of the market, enabling private companies’ shareholders to sell in the absence of a liquidity event in order to generate capital for other investment opportunities or personal financial needs. The structuring of such transactions has become more sophisticated as it involves the handling of contractual restrictions such as rights of first refusal and, more recently, involved tender offers to later-round investors. Existing secondary investment platforms can open doors to diversification across different industries, stages of growth and geographies.

In recent years, growth companies find themselves compelled to remain private for extended periods. This contrasts with the dynamics that prevailed throughout most of the 2010s, when the choice may have been strategic and driven by abundant private funding options. However, given the diminishing exit opportunities, this decision has become less discretionary in today’s market conditions. Especially for early-stage investors, secondary markets can offer an attractive opportunity to exit their investment earlier than anticipated, which becomes particularly intriguing when the start-up experiences substantial value appreciation prior to reaching a stage where it either goes public or undergoes acquisition.

At the same time, substantial challenges remain, especially concerning information disparity and particularly on the buyer’s side, where investor demand and willingness to interact with growth companies may not be able to adequately address existing supply at all times. Buyers have been seen to anticipate steep discounts regarding the net present value of their investment objects. Nonetheless, liquidity in the private marketplace has increased during the past few years, facilitated by initiatives such as Nasdaq Private Market, an initiative by the London Stock Exchange that has facilitated more than USD45 billion in transactional volume since inception, Forge Global, and others.

Between 2012 and 2021, the global marketplace for secondary transactions grew from USD13 billion to USD60 billion. Against this background, some expect that steep discounts may no longer be necessary in the future and private and public markets will converge further.

Complementary financing structures

With venture capital deal-making expected to rebound in 2024, there is potential for a shift towards a more coherent blend of equity and non-dilutive financing within the capital structure of growth companies.

Globally, start-ups are facing an environment shaped by a tangible discount rate, making debt funding less appealing. However, as existing loans mature, borrowers will likely seek refinancing options and placing reliance solely on equity financing may not suffice. Additionally, there is likely to be a growing demand for non-dilutive debt financing in sectors requiring substantial capital investment ‒ for example, real estate, crypto-mining, aerospace and space technology, as well as clean energy and renewable technology. In 2024, US tech debt is forecast to increase to between USD14 billion and US16 billion, representing a 25% increase from 2023 levels.

Anticipated rebound in venture capital deal-making in 2024

Notwithstanding persistent challenges in the venture capital market and the struggles faced by many companies in securing funding since 2021, venture capital deal-making is anticipated to rebound to a certain extent in 2024 and beyond. On the one hand, investors are hopeful that macroeconomic conditions will improve, permitting a deployment of dry powder and an exploitation of backlogged opportunities due to a lack of activity in 2023. On the other hand, pressures to find exit opportunities exist, as LPs are yet to realise capital inflows often perceived as overdue.

AI-related investments, in particular, can be expected to hold up previously garnered momentum – even though the focus may shift from large language models towards real-world applications. The development of industries such as crypto, fintech or cleantech are highly contingent upon broader macro trends.

Market observers believe that there will not be a return to the heady days of 2021, as start-ups and investors act with more discipline going forward. Nonetheless, growth companies and the venture capital industry will most likely be key drivers behind many of the breakthroughs and innovations of the 21st century and a shaping force for the long-term fate of the global economy.